Australia's Macarthur Coal rejected a $3 billion bid from U.S. miner Peabody Energy, saying it undervalued the growth prospects of a company which controls a third of the world's supply of a cleaner coal coveted by steelmakers.

Shares in Macarthur jumped 20 percent on Wednesday following news of the Peabody offer of A$13 a share, pitched at a small 7.5 percent premium to its Macarthur's last trade prior to the announcement.

It's got zero probability of succeeding. It doesn't reflect the rarity value of the company's assets, said Tim Schroeders, portfolio manager at Pengana Capital, which does not own Macarthur shares.

The offer is the latest in a flurry of coal company deals in Australia, tapping into booming coal demand for China and India, and matches the biggest deal so far, Chinese firm Yanzhou Coal Mining Co's <1171.HK> $2.9 billion takeover of Felix Resources last year.

Macarthur's appeal, highlighted by Peabody, is that it has 145 million tons of reserves of low-volatile PCI coal, prized by steelmakers as a way to extend the life of costly coke ovens at steel mills and reduce greenhouse gas emissions.

Peabody believes that there is a strong strategic rationale for a combination of Macarthur's operating assets and project pipeline with Peabody's growing Australian platform of metallurgical and thermal coal production, the company said.

Macarthur, Australia's second-largest independent coal miner behind New Hope Corp , is being advised by JPMorgan , and Peabody is being advised by Rothschild.

BIG HURDLES

Peabody, the world's biggest listed coal miner, already owns nine coal operations in the Australian states of Queensland and New South Wales which produced 22.3 million tons of coking and thermal coal in 2009.

Its offer is conditional on winning support from Macarthur's three major shareholders, China's CITIC Resources <1205.HK>, top global steel maker ArcelorMittal and world no. 4 steelmaker POSCO <005490.KS>, which together own 47.3 percent of Macarthur.

Peabody said it remained open to talking to Macarthur's board and was in talks with the three big shareholders.

It said the three big shareholders would be offered the alternative of keeping their existing stakes in Macarthur.

It is unlikely ArcelorMittal and POSCO would be willing to sell their stakes, given that they paid around A$20 a share for their stakes two years ago.

CITIC Resources, a founding shareholder in Macarthur, and POSCO declined to comment on the offer.

The offer is also conditional on Macarthur's proposed A$832 million takeover of Gloucester Coal not going ahead.

Macarthur shareholders are set to vote on April 12 on the Gloucester deal, which involves issuing shares to Gloucester's main shareholder, Singapore-listed commodities firm Noble Group .

Gloucester's shares slid 10 percent to A$9 on the prospects of the deal falling through.

Peabody justified its A$3.3 billion offer, saying it was above the top end of an independent expert's valuation of Macarthur shares last month for the Gloucester deal, but shareholders said it was far too low.

If Peabody is serious about its intentions, I would be anticipating this is an opening gambit only, said a fund manager with shares in Macarthur, who declined to be named.

He said the bid failed to reflect sharp increases in coal prices over the past few months and escalating forecasts which have pushed some analysts' valuations on Macarthur to more than A$17 a share.

On top of that you've got a pervasive theme that the Chinese are increasingly going to be relying on seaborne imports to stoke the mills, he said.

Macarthur's shares jumped to a 19-month high of A$14.50 after the announcement and last traded up 16 percent at A$14.06.

Peabody's proposal is highly conditional and does not fully value Macarthur and its significant growth prospects, Macarthur Chairman Keith DeLacy said in a statement.

(Additional reporting by James Regan in SYDNEY, Alison Leung in HONG KONG, Kim Yeon-hee in SEOUL; Editing by Ed Davies and Valerie Lee)

($1=1.089 Australian Dollar)

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